Glaxo To Pay IRS $3.4 Billion

By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, September 12, 2006

Drug maker GlaxoSmithKline Holdings Inc. has agreed to pay the Internal Revenue Service $3.4 billion to settle claims that it underpaid U.S. taxes since 1989 by in effect shifting profits abroad.

The payment will be the largest the IRS has received to settle a tax dispute, the agency said yesterday.

Glaxo estimated that the matter could have cost it as much as $15 billion.

"We really felt that we paid sufficient taxes throughout the period, but the settlement is in the best interest of shareholders given the risk and uncertainty of the litigation," said Patricia Seif, a Glaxo spokeswoman.

The case, which began with an IRS audit in the early 1990s, involved the way Glaxo paid taxes on U.S. profits from such popular drugs as Zantac, a stomach remedy, Imitrex, for treatment of migraines, and Ceftin, an antibiotic.

At issue was one of the thorniest concerns facing tax collectors -- how multinational corporations apportion profits and expenses among units in different countries. The IRS has said that companies often manipulate cross-border transactions to minimize taxes.

The Glaxo settlement "sends a strong message of our resolve to continue to deal with this issue going forward," IRS Commissioner Mark W. Everson said in a written statement. Everson said the IRS was committed to resolving such controversies "without litigation, provided that our ultimate goal of compliance is not compromised."

Sen. Byron L. Dorgan (D-N.D.), a former state tax commissioner, said that the broader problem has cost the U.S. Treasury tens of billions of dollars and that the government has taken "precious little effective action" to address it.

"One of the messages" from the Glaxo settlement "might be that you can settle for substantially less than you allegedly owe," Dorgan said. "On the other hand, at least the Internal Revenue Service is suggesting that they're taking action here."

Though Glaxo was paying only a fraction of the potential cost, "that's such a large amount they couldn't possibly have felt confident in their position," said Robert Willens, a Lehman Brothers tax analyst.

"It can't be good news for all the other multinationals that have this issue," Willens added.

The IRS had alleged that Glaxo's parent company, GlaxoSmithKline PLC, based in Britain, had allotted too little of its profits from worldwide drug sales to its U.S. subsidiary. Determining the proper split in what are known as "transfer pricing" cases can involve apportioning such intangible items as the value of trademarks and brand names.

The settlement, which includes interest, covers the years 1989 through 2005. The dispute over Glaxo's taxes for 1989 through 2000 had become the subject of litigation in U.S. Tax Court and was scheduled to go to trial in February. As part of the deal, Glaxo abandoned its claim that it was owed a refund of $1.8 billion.

Glaxo said it had previously set aside money to cover the settlement, adding that the payment will not have "any significant impact" on the company's earnings. The net cost of the settlement will be about $3.1 billion after taking into account such items as the effect on the company's state and local taxes, Glaxo said.

Shares of Glaxo's parent rose 17 cents yesterday, to $55.25, on the New York Stock Exchange.

© 2006 The Washington Post Company